Life insurance is undeniably one of the most essential financial tools that provides financial support in the event of illness or death. It is a binding agreement under which you pay a small premium in exchange for a sizable payout when you need it. To cater to the needs of customers, policies now involve benefits like guaranteed returns as well. There are various types of life insurance policies that will help you fulfil different needs such as – protection, savings, and investment.
The insurer is required to pay a death benefit (also known as the sum assured) if you pass away within the policy term. Nevertheless, if you live through the term, you might be eligible for a maturity bonus, depending on the type of your life insurance policy.
This blog talks about life insurance bonuses, their types, and the bonus calculation formula.
A life insurance company declares a bonus at the end of a financial year. The declaration of a bonus depends on the performance of the company. When any surplus assets, such as the investments of the policyholders who passed away, are evaluated following the evaluation of the company's assets, the company declares bonuses for other policyholders that can be given to them at maturity or along with the sum assured.
Key Takeaways
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A life insurance bonus is an extra monetary benefit paid out to policyholders in addition to the basic sum assured. It acts as a reward or incentive given by the insurer based on the company's performance and surplus profit earned during a financial year. Not every plan offers this benefit—it is applicable only to participating life insurance policies like endowment or money-back plans.
The bonus gets accumulated over the policy term and is usually payable at the time of policy maturity or in the unfortunate event of the policyholder's demise. This addition enhances the overall value of the policy and encourages policyholders to stay invested in the plan.
Life insurance policy bonuses are generally announced and included annually, but the actual payment of the bonus is determined by the policy form.
Picture this: you’ve been paying premiums year after year, and as your policy matures or if an unfortunate event occurs, those silent accumulations make their grand appearance. That’s your bonus—loyal, cumulative, and performance-driven. While the bonus is calculated yearly, it stays parked until the moment it matters most.
On Maturity: The bonus gets paid along with the sum assured when the policy reaches maturity.
On Death: In case of the death of the policyholder within the policy period, the bonus so far earned is paid in addition to the death benefit.
On Surrender (Selective Cases): In exceptional cases and as per policy conditions, a lower bonus can be payable on surrender of the policy.
It should be noted that not all policies promise a bonus annually. The payment depends on the financial performance of the insurance company and other external factors.
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A bonus is simply an additional sum of money or reward you receive in addition to your base compensation. A similar idea is shared by life insurance providers, who give policyholders bonuses each year in addition to the minimum sum assured to which they are entitled (depending on the type of policy they have). Depending on the terms and conditions of your policy, this additional sum may be paid out either at policy maturity or upon the insured's demise.
A life insurance company uses the premiums paid by policyholders as part of its accumulated assets, which are used to cover claims in the future. The profit, which the insurer distributes as bonus payments at the completion of the financial year or policy maturity, is generated by the insurer's claim experience and returns on investment combined together. The extra amount coming from extra asset valuation is what creates the bonus.
Bonus is either computed as a percentage of the sum assured or as a certain amount per ₹1000 of the sum assured. For example, if the bonus is ₹50 per ₹1000 for a policy with a sum assured of ₹1 lakh, the annual bonus will be ₹5000. For a policy term of 10 years, the simple reversionary bonus will be ₹50,000. The bonus rate depends on several factors, such as return on company assets, bonuses declared in the previous year, claims filed, expected interest rates in the future, and several other estimates.
It is significant to highlight that only owners of participating life insurance policies are eligible for bonuses. This applies to traditional plans such as endowment or money-back plans. Even such plans, however, might occasionally forego the bonus to provide a guaranteed boost to the insured, mentioned explicitly at the time of buying. When buying a life insurance plan, carefully review the policy documentation and verify the benefits provided by the insurer, including any bonuses, if any.
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All bonuses are not equal; each is designed to perform a specific function, has a distinct payment mechanism, and relies on how long you've been holding your policy. Knowing these differences can assist you in figuring out which policy is most suitable for your long-term objectives.
Here are the most important types:
Simple Reversionary Bonus: Annually declared and lapped up into the sum assured. Payable only upon maturity or death, whichever is earlier.
Compound Reversionary Bonus: Compounded every year, this bonus raises the bonus amount and base sum assured year by year.
Interim Bonus: Paid upon maturity or settlement of a policy between bonus declaration dates. It bridges the gap between the last declared bonus and the settlement.
Terminal Bonus: It is a one-time bonus that is made at maturity of the policy or on death. It is a reward for long-term policyholders and is not payable each time.
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Ever ask yourself why bonuses in life insurance change from year to year? It's a result of careful calculation based on several internal and external factors. From the financial performance of your insurer to the kind of policy you have, every factor contributes to determining your bonus potential. Knowing them can enable you to make more informed, objective-based decisions while buying or keeping your policy.
Company Profits: The center of all bonus payments is the insurer's year-end profit. After paying all liabilities, if a surplus remains, some of it is allocated to policyholders in the form of a bonus. Years with profits tend to result in greater bonus declarations.
Investment Returns: Your premiums are invested by insurers in a diversified portfolio. When investments have good returns, the surplus thus generated goes up, and so does the chance of a bonus being declared.
Claim Experience: Fewer claims in a year imply that the company holds more capital. This excess can then be shared among policyholders, which raises individual bonus levels.
Policy Term & Type: Longer policy terms tend to result in higher total bonuses. Likewise, traditional participating policies, such as endowment and money-back policies, are more likely to pay bonuses than non-participating policies.
Sum Assured:Bonuses are usually announced per ₹1000 of the sum assured. Policies with greater coverage, therefore, automatically command a proportionately greater bonus, assuming all other parameters are in a positive direction.
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Life insurance bonuses are not merely financial extras; they're trust boosters. They indicate that your insurance company didn't merely keep your money; they grew it for you. If chosen wisely, participating life insurance policies can be wealth accumulators that catch you off guard at the opportune time. But don't be fooled—bonuses need prudence, patience, and a mighty provider.
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Participating Policy: A life insurance plan eligible to receive bonuses declared by the insurer.
Sum Assured: The guaranteed amount paid by the insurer either on death or maturity.
Simple Reversionary Bonus: A fixed bonus added yearly to the sum assured.
Terminal Bonus: A one-time bonus paid at the end of the policy term or upon death.
Interim Bonus: Bonus paid for the period between the last declared bonus and the date of maturity or claim.
Disclaimer - This article is issued in the general public interest and meant for general information purposes only. The views expressed in this blog are solely those of the writer and do not necessarily reflect the official policy or position of Canara HSBC Life Insurance Company Limited or any affiliated entity. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the blog or the information, products, services, or related graphics contained in the blog for any purpose. Any reliance you place on such information is therefore strictly at your own risk. You should consult with a qualified professional regarding your specific circumstances before taking any action based on the content provided herein.
Along with the final maturity amount, the bonus amount is supplied. The premium is the sum of money that a policyholder must pay in exchange for the benefit that the insurer promises to grant should the predetermined event occur.
The maturity bonus is determined when the Yearly Management Charges are subtracted from the Policy, less any Loyalty Bonuses given to the Policy.
The No Claim Bonus is the sum that the insurance company pays the policyholder if there are no claims in any of the fiscal years that are covered by the policy.
It's unlikely that the bonuses announced by the insurance company will have an impact on your premium. The premium may be affected by additional variables, including aging, lifestyle changes, and health concerns. To estimate their premium amount depending on several circumstances, one can utilise the life insurance premium calculator.
